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ch19_

13 Pages
103 Views
Winter 2011

Department
Rotman Commerce
Course Code
RSM100Y1
Professor
Michael Szlachta

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Ch 19 Understanding Securities and Investments
Securities Markets
-securities: stocks and bonds(which represent a secured-asset bas claim on the part
of investors)
-stockholders have claims on some of a corporation’s assets (and a say in how the
company is run) b/c each share of stock represents part-ownership
-bonds represent strictly financial claims for money owed to bondholders by a
company
-stocks and bond sold in securities markets
Primary and Secondary Markets for Securities
-primary securities markets: the sale and purchase of newly issued stocks and
bonds by firms or governments
-these so-called private placements allow the businesses that use them to keep their
plans confidential
Investment Banking
-to bring a new security to market, the issuing corporation must obtain approval
from a provincial securities commission
-Also needs the services of an investment banker
-Investment banker: any financial institution engaged in purchasing and reselling
new stocks and bonds
1. advise company on timing and financial terms for the new issue
2. by underwriting (buying) the new securities, investment bankers bear
some of the risk of issuing the new security
3. they create the distribution network that moves the new securities
through groups of other banks and brokers into the hands of individual
investors
-secondary securities market: the sale and purchase of previously issued stocks and
bondsToronto Stock Exchange(TSX)
Stocks
Common Stock
-individuals/companies buy a form’s common stock in hope that stock will
increase in value, affording them a capital gain, and/or will provide dividend
income
-stock values are expressed in 3 ways :
par value
market value
book value
-Par value:
oFace value of a share of stock
oEach company must preserve the par value money in its retained eanings,
and it cannot be distributed as dividends
oUsed by accountants but of little significance to investors
-Market value:
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oStock’s real value
oCurrent price of a share on the stock market
oMarket value reflects buyers’ willingness to invest in a company
oMarket price of a stock can be influenced by both objective factors and
subjects factors (rumours), investor relations( playing up the positive
aspects of a company’s financial condition to financial analysts and
financial institutions), stock broker recommendations
-Book value: value of a common stock expressed as total stockholders equity
divided by the # if shares of stock
oowners’ equity-sum of company’s common stock par value, retained
earnings, and additional paid-in capital
oused as comparison indicator because, for successful companies, the
market value us usually greater than the book value
when market price falls to near book value, some investors buy the
stock on the principle that it is underpriced and will increase in
value in the future
-Investment Traits of Common Stock
oCommon stocks are among the riskiest of all securities
oUncertainties about the stock market can quickly change a given stock’s
value
oWhen companies have unprofitable years, they often cannot pay dividends
oShareholder’s income-and perhaps share price-may both drop as a result
oCommon stocks offer high growth potential
oBlue-chip stocks historically provided investors with steady income
through consistent dividend payouts
-What is a Blue-Chip Stock?
oBlue-chip stock: stocks from well-established, financially sound forms
oWith proliferation of internet and start-up dot-coms about a decade ago,
some ppl started to think that perhaps many of the old performance
guidelines for assigning blue-chips status to stock had changed
oGuidelines such as a company’s history of dividend payouts, steady
growth in earnings per share, and a low price-earnings ratio(currents stock
price divide by annual earnings per share) didn’t seem to matter anymore
b/c the market price of start-ups that hadn’t ever earned a profit were
soaring
Market capitalization: the dollar value (market value) of stocks
listed on a stock exchange
Computed by multiplying the number of a company’s
outstanding shares times the value of each share
In terms of market capitalization almost all of the
companies in the top 10 are either financial institutions or
natural resource companies
oRoyal Bank of Canada
oToronto Dominion Bank
www.notesolution.com
oImperial Oil Ltd.
Rankings have changed dramatically during last decade
Market capitalization of most companies has declines as a
result of the recession that began in 2008
Preferred Stock: stock that pays dividends that are expressed as a percentage of par value
osome preferred stock is callable
oissuing firms can require the preferred shareholders to surrender their
shares in exchange for a cash payment
oamount of this cash payment, known as call price, is specified in the
agreement between the preferred shareholders and the firm
Investment Traits of Preferred Stock
ob/c of its preference on dividends, preferred stock is less risky than the
common stock of the same company
omost preferred stock is cumulative
ocumulative preferred stock: preferred stock on which dividends not paid in
the past must first be paid up before the firm may pay dividends to
common shareholders
oincome from cumulative preferred stock is not as certain as corporate
bonds of the same company
ocompany cannot pay dividends if it does not make a profit
opurchase price of preferred stock can also fluctuate, leading to a capital
gain or loss for the shareholder
ogrowth potential of preferred stock is limited due to its fixed dividend
Stock Exchanges: an organization of individuals formed to provide an institutional setting
in which shares of stock can be bought and sold
-most of the secondary market for stocks is handled by organized stock exchanges
-exchange enforces certain rules to govern its members trading activities
-most exchanges are non-profit corporations establishedto serve their members
-to become a member, an individual must purchase one of a limited number of
memberships-calledseats- on the exchange
-b/c all orders to buy or sell must flow through members, they have a legal
monopoly
-memberships can be bought and sold like other assets
Trading Floor
-each exchange regulates the places and times at which trading may occur
-alternative trading systems (ATS) use computers to match buy and sell orders
-these ATSs have lowered cost and increased speed of stock trading
Broker: individual licensed to buy and sell securities for customer in the secondary
market; may also provide other financial services
-receives buy and sell orders from those whoa re not members of the exchange and
executes the orders
-in return, earns commission from order placer
-brokerage assistance can be purchased at either discount or full-service prices
www.notesolution.com

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Description
Ch 19 Understanding Securities and Investments Securities Markets - securities: stocks and bonds(which represent a secured-asset bas claim on the part of investors) - stockholders have claims on some of a corporations assets (and a say in how the company is run) bc each share of stock represents part-ownership - bonds represent strictly financial claims for money owed to bondholders by a company - stocks and bond sold in securities markets Primary and Secondary Markets for Securities - primary securities markets: the sale and purchase of newly issued stocks and bonds by firms or governments - these so-called private placements allow the businesses that use them to keep their plans confidential Investment Banking - to bring a new security to market, the issuing corporation must obtain approval from a provincial securities commission - Also needs the services of an investment banker - Investment banker: any financial institution engaged in purchasing and reselling new stocks and bonds 1. advise company on timing and financial terms for the new issue 2. by underwriting (buying) the new securities, investment bankers bear some of the risk of issuing the new security 3. they create the distribution network that moves the new securities through groups of other banks and brokers into the hands of individual investors - secondary securities market: the sale and purchase of previously issued stocks and bondsToronto Stock Exchange(TSX) Stocks Common Stock - individualscompanies buy a forms common stock in hope that stock will increase in value, affording them a capital gain, andor will provide dividend income - stock values are expressed in 3 ways : par value market value book value - Par value: o Face value of a share of stock o Each company must preserve the par value money in its retained eanings, and it cannot be distributed as dividends o Used by accountants but of little significance to investors - Market value: www.notesolution.com o Stocks real value o Current price of a share on the stock market o Market value reflects buyers willingness to invest in a company o Market price of a stock can be influenced by both objective factors and subjects factors (rumours), investor relations( playing up the positive aspects of a companys financial condition to financial analysts and financial institutions), stock broker recommendations - Book value: value of a common stock expressed as total stockholders equity divided by the # if shares of stock o owners equity-sum of companys common stock par value, retained earnings, and additional paid-in capital o used as comparison indicator because, for successful companies, the market value us usually greater than the book value when market price falls to near book value, some investors buy the stock on the principle that it is underpriced and will increase in value in the future - Investment Traits of Common Stock o Common stocks are among the riskiest of all securities o Uncertainties about the stock market can quickly change a given stocks value o When companies have unprofitable years, they often cannot pay dividends o Shareholders income-and perhaps share price-may both drop as a result o Common stocks offer high growth potential o Blue-chip stocks historically provided investors with steady income through consistent dividend payouts - What is a Blue-Chip Stock? o Blue-chip stock: stocks from well-established, financially sound forms o With proliferation of internet and start-up dot-coms about a decade ago, some ppl started to think that perhaps many of the old performance guidelines for assigning blue-chips status to stock had changed o Guidelines such as a companys history of dividend payouts, steady growth in earnings per share, and a low price-earnings ratio(currents stock price divide by annual earnings per share) didnt seem to matter anymore bc the market price of start-ups that hadnt ever earned a profit were soaring Market capitalization: the dollar value (market value) of stocks listed on a stock exchange Computed by multiplying the number of a companys outstanding shares times the value of each share In terms of market capitalization almost all of the companies in the top 10 are either financial institutions or natural resource companies o Royal Bank of Canada o Toronto Dominion Bank www.notesolution.com
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